Plan I Fostering innovation for long-term growth 5 February 2013 - - PowerPoint PPT Presentation

Plan I

Fostering innovation for long-term growth

5 February 2013 Stian Westlake, Exec Dir

• f Policy & Research

@stianwestlake

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Two plans dominate the debate

“Plan A”: Austerity “Plan B”: Stimulus Cut government spending Reduce government deficit Maintain low interest rates Deregulate to encourage growth Maintain spending - if necessary borrowing more Preserve employment and demand Reduce deficit as economy recovers

OR

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Where will economic growth come from?

Productivity growth after major UK recessions

Source: ONS

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Quarters since start of recession Year 1 Year 2 Year 3 Year 4

But Plan A or Plan B alone won’t solve our problems

Slowing before 2007; sharp fall since 2008

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Productivity Changing economic realities Major societal challenges The long-term affects the short- term Will what worked in the past work now? “The Great Stagnation”, “Race Against the Machine” Green technology and healthcare present unique economic issues Stimulus and investment spending work better if the underlying economy works better

UK Business growth, 2004-08 Innovators Non-innovators Revenue growth, %/yr Make-up of UK economic growth

Source: Nesta, The Innovation Index (2009-12)

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Innovation: 67% of growth %/yr, 1990-2007

Source: Nesta, The Vital Six Per Cent (2009)

Innovation is the main driver of growth

Both for the economy as a whole… …and for individual businesses

Innovation investment has fallen sharply since 2008

Between 2008 and 2009 investment in innovation fell by 7% in real terms Since the recession began there has been a 14% drop in real terms in innovation investment

UK Business investment in innovation (constant prices)

Source: Nesta, The Innovation Index (2012)

£24 bn drop

Innovation investment started slowing before 2008

UK business investment in innovation

(%age of GDP) Intangible (“innovation”) investment

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Source: Nesta, The Innovation Index (2009-12)

Tangible investment fell, and its composition changed

Tangible investment (buildings, computers, vehicles, machinery)

UK business investment in tangible assets (%age of GDP) Composition of UK businesses’ tangible investment (£bn, nominal)

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Buildings Plant ICT Vehicles

Source: ONS; Nesta, The Innovation Index (2012)

All the while, the business sector’s surpluses increased

Financial crisis UK Business sector currency and deposits (% of GDP) Net lending to UK businesses (% of GDP)

Source: ONS; Bank of England

So: an innovation collapse has followed an age of cash and concrete

2008-2012

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2000-2008 Investment in innovation falls sharply Innovation investment levels off and begins to decline Tangible investment falls Buildings dominate, ICT investment falls Businesses accumulate cash No evidence of recovery yet

Other countries have made innovation a top priority since the crisis

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Korea Germany France Japan USA UK Government Outlays on R&D, 2007=100

George Osborne, 3 October 2011

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“My children are eight and ten years

• ld.

I don't want them to read about how China has just built the world's most advanced aircraft; how India is leading the globe in computer design; and have to say to my children: that used to be Britain. I want Britain to be the home of the greatest scientists, the greatest engineers, the greatest businesses - a land of innovators.”

But in the UK other commitments have won out

Discretionary government spending on science, technology and innovation, 2012/13 to 2014/15, £million

Science budget “ring fence”* R&D tax credit changes EIS, SEIS, VCT reform

Science capital fund, aerodynamics centre, graphene centre

Video games and VFX credit Entrepreneurs relief and EMI Catapult Centres SMART awards and SME innovation Smaller cities broadband Business angel co-investment Corporation tax cuts Weekly collection support scheme (“bins fund”) Ring fenced aid budget Ring fenced health budget

Science, Technology and Innovation Other examples

8,469 46,045 Total ~£2.6 billion

* Difference between planned expenditure and average spending consolidation of other departments Source: Budgets 2009, 2010 (x2), 2011,2012, BIS Research and Innovation Strategy, TSB Science ring fence Other innovation Aid Ring fence Health Ring fence

Spending to scale

£ billion

1.0 1.6 8.5 46.0

So what can the Government do about it?

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“Just get out of the way” “Picking winners”

Lesson 1: Don’t get stuck in a PICL

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P I C L

lanning mmigration

• mpetition

abour market reform Important, but not enough

There is another way

Banking crisis and recession Austerity + Innovation Recovery and growth 1990 1991-3 1995-2011

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Three main areas of recommendations

• 1. Investing

more resources into innovation

• 3. Creating a

lasting culture of innovation

• 2. Making the

innovation system work better

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Area 1: UK capital markets have little bearing on innovation investment

Source: Nesta and the Big Innovation Centre

The UK’s capital markets and business investment in innovation, £ billion, nominal

500 1000 1500 2000 2500 3000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Net profits re-invested by UK businesses (£bn) Net inflow of capital from flotations (£bn) Net equity investment in UK businesses (£bn) Net financial acquisitions (debt, MMIs, securities) UK businesses (£bn) Investment in innovative activities / NESTA innovation index (£bn)

1999 to 2007

Total capital raised above 1998 levels Additional innovation investment above 1998 levels

£6.6 tr £0.2 tr

Area 1: The right financial architecture

• A £200m venture co-

investment fund

• A business bank with

the freedom and expertise to bank innovation

• New sources of

finance: peer-to- peer lenders, long- term investors

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Area 1: Harnessing procurement

• Put 1% of procurement

towards innovative solution

• Follow US SBIR model
• Create a £2.3 billion

“Innovation Engine”, providing demand for growth businesses

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Area 1: Twenty-first century infrastructure

• Invest in the

infrastructure of the twenty-first century, not just the nineteenth

• Use low interest rates to

build super-fast broadband, smart grids

• Remove planning

barriers in innovative clusters

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Area 2: invest in demonstrators

• Fund demonstrators

connecting research, business, infrastructure and government

• Beyond manufacturing:

services, retail, adoption

• f technologies

Area 2: better incentives for innovators

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• Modernise IP law – fewer

junk patents

• Use Challenge Prizes to

mobilise innovators to tackle tough problems

Area 2: Harness public and social innovation

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• Public services 24% of

GVA

• Harnessing evidence-

based solutions, new technologies and social innovators

• Early investment and

decommissioning

• Information-sharing

Area 3: culture of innovation

Education for digital makers Break down the barriers to innovation

• Educate both the “brain” and the “hand”
• A C21st BBC Computer Literacy project
• A commitment to innovation in education
• Allow businesses to attract the best global

talent

• Regulate with competition in mind

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Where’s the money?

4G auction

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ERDF £4+ billion to be raised in 2013 Prizes? Investment? £1+ billion for innovation 2014-2020 Procurement £2+ billion per year if 1% of procurement went through SBRI Business bank £1 billion of capital for growing businesses